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California LCFS Credit Deficit Deepens Under Tougher 2026 Standards

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California's low-carbon fuel market became more constrained during the first quarter of 2026 as stricter emissions standards and lower production of renewable fuels widened the program's supply deficit, according to new data released by the California Air Resources Board, TPH Energy Research analyst Matthew Blair said in a note on Monday.

The state's Low Carbon Fuel Standard, which is designed to reduce the carbon intensity of transportation fuels by requiring fuel suppliers to generate or purchase emissions credits, recorded a credit shortfall of 2.8 million metric tons in the first quarter. That compared with a deficit of 1.9 million metric tons in the fourth quarter of 2025.

Credit generation fell to 6.9 million metric tons from 7.8 million metric tons in the previous quarter, reflecting both tougher compliance requirements that took effect at the start of the year and lower production of renewable fuels.

California strengthened the program's carbon-intensity target to 24.2% below 2010 levels for 2026, up from a 22.75% reduction required last year. The stricter standard reduced the number of credits earned for each gallon of qualifying low-carbon fuel.

Renewable diesel production also declined during the quarter after uncertainty surrounding the federal Renewable Volume Obligation program delayed investment and production decisions. Renewable diesel volumes in California fell to 456 million gallons in the first quarter from 530 million gallons in the previous quarter.

Meanwhile, emissions deficits generated by conventional gasoline and diesel increased to 9.8 million metric tons from 9.6 million metric tons, as the tougher compliance standard more than offset a seasonal decline in gasoline consumption.

The state's bank of unused LCFS credits ended the quarter at 36.8 million metric tons, little changed from the previous quarter. However, because demand for credits increased, the bank now represents about 339 days of compliance demand, down from 379 days at the end of 2025 and more than 600 days in the second quarter of last year.

The tightening balance between credit supply and demand has helped lift LCFS credit prices. Credits traded around $75 per metric ton at the end of last week, compared with roughly $56 at the beginning of the year.

Higher LCFS credit prices generally improve returns for producers and marketers of low-carbon fuels, including renewable diesel and renewable natural gas.

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